AMAT Rises Despite Soggy FYQ3: Buy For 2014 Growth, Say Bulls

By Tiernan Ray

Shares of chip equipment maker Applied Materials (AMAT) ended the day up 29 cents, or almost 2%, at $15.62, after the company yesterday afternoon missed fiscal Q3 expectations for revenue and profit, offered a lighter-than-expected Q4 view, and said President Gary Dickerson will take over for Mike Splinter as CEO next month.

With the company reiterating a forecast for next year of 10% to 20% growth in 2014 of spending on wafer fab equipment, bulls on the stock looked past the disappointing Q4 outlook, and the weak results in the company’s business tied to solar energy, instead urging investors to buy for next year’s rebound in spending. Bears fretted that growth next year may have uncertain timing, and that margins may be under pressure.

The shares have received one ratings change today, an upgrade, from D. A. Davidson‘s Thomas Diffely, who raised his rating to Buy from Neutral, and raised his price target to $18 from $15, with the expectation capital investment by chip customers will be healthy next year.

Shares of other chip equipment firms were mixed today. Lam Research (LRCX) stock was 64 cents, or 1.4%, at $47.84, and Teradyne (TER) was up 2 cents at $15.98, while KLA-Tencor (KLAC) closed down 53 cents, or 0.9%, at $56.54.

Bullish!

Patrick Ho, Stifel Nicolaus: Reiterates a Buy rating, and raises his price target a buck to $18. “We believe the near-term environment is very consistent with our prior channel checks and the commentary from other companies this past earnings season. Foundry pushouts have created a “bubble” or digestion period in the September/October quarter time frame. While memory has picked up more than expected, this will not offset the decline in foundry spending in the quarter. From our standpoint, this should not be a major surprise [...] We believe Applied is well positioned to benefit from many key technology inflection points that are emerging (FinFET, 3D devices, advanced packaging) and outperform the overall industry [...] Looking ahead to 2014, we also believe the operating model will continue to see improvements as it tracks to some of the key metrics outlined by management in its recent Analyst Day. We believe improving gross margins and disciplined opex management will display itself in 2014 and beyond, driving its overall strategic goal of “profitable growth’.” Ho cut his fiscal 2013 estimate to $7.5 billion and 70 cents from $7.83 billion and 77 cents.

Weston Twigg, Pacific Crest: Reiterates an Outperform rating and a $19 price target. “Heading into the quarter, most were prepared for soft guidance, and it looks OK to us. Light FQ4 guidance is not a concern, as demand should rebound soon [...] Applied reiterated its full-year industry demand outlook of $27 billion to $30 billion, and noted that mix has shifted a little more toward memory than previously expected. Applied also indicated that foundry demand is low now, but it should begin to recover in CQ4 and through 2014 as foundries ramp 20 nm and FinFET processes. For memory, DRAM demand is centered on node transitions, but could lead to capacity additions at one or two customers next year. NAND demand is expected to improve as 3-D NAND ramps through 2014. Overall, Applied expects industry demand to grow 10% to 20% in 2014, led by foundry and NAND; we are modeling demand to grow 8%, as we expect foundry FinFET and 3-D NAND to ramp more in 2H14 and through 2015.” Twigg cut his fiscal 2014 estimate from $9 billion in revenue to $8.9 billion, and trimmed his EPS estimate to 96 cents from 98 cents.

Bearish!

Vishal Shah, Deutsche Bank: Reiterates a Hold rating, and a $15 price target. “Operationally, the company seems to be executing well ahead of expectations and soft Oct Q outlook is consistent with guidance provided by other industry peers as well as reflective of a temporary foundry slowdown. With Gary Dickerson formally taking over the CEO position, we expect investors to give more credibility to longer term EPS/share gain targets. That said, we believe uncertainty over shape and magnitude of 2014 WFE spending could remain a near term overhang on shares.” For the full year 2013, Shah cut his estimates to $7.48 billion in revenue from a prior $7.5 billion, but raised his EPS estimate to 56 cents from 52 cents.

John Pitzer, Credit Suisse: Reiterates a Neutral rating and raises his price target to $15 from $13. “Positives: AMAT announced that Gary Dickerson will take over as CEO while Mike Splinter will continue as Chairman of the Board. Gary Dickerson has already made significant improvements to the company and the elevation to CEO will allow him to make broader changes that can benefit the company. We believe that investors will view this transition favorable; AMAT indicates that it has gained marketshare in Etch for 3D NAND. Etch gain on 3D NAND could be significant enough to curb erosion of marketshare in Etch. Negatives: AMAT indicated that GM will decline in OctQ on flat revenues and decline again in JanQ on expected increase in revenues. The company believes that margins are declining due to higher shipments of Etch systems – could become a problem for LRCX on some applications; AMAT indicated that it will ship 20% higher volume of Eval units to customers in OctQ/JanQ. This could indicate a more competitive environment among the equipment suppliers and LRCX/KLAC may be forced to ship more eval units as well. Display revenues guided lower. AMAT indicated OctQ display revenues to decline sequentially despite high level of orders in JulQ. This could be an early sign of slowdown in Display market due to an inventory correction.” For this calendar year, Pitzer cut his estimate to $8.16 billion and 77 cents a share from a prior $8.4 billion and 78 cents.

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AUGUST 16, 2013 7:12 P.M.

No erosion of recent market share in AMAT etch wrote:

There has been no recent market share erosion in etch in AMAT. It lost a lot of share when DRAM went from trench to stack and in most cases Tokyo Electron has lost market share and LRCX has gained. Pitzer should refer to Gartner market share details Y/Y. AMAT has been more of a non-entity. But with perpendicular 3D NAND etch coming back, the deep trench etch IP puts AMAT the favored company for high aspect ratio etch.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.